Is NYC coming back sooner than we think?

Research Is NYC coming back sooner than we think? 23 AUGUST 2016 7:26 AM New York City and its Manhattan submarket could rebound sooner than expected with the amount of foreign capital coming in and a steady supply pipeline. By Paul Breslin and Julia Zhang REPORT FROM THE U.S. New York City has been in the news throughout 2016, with talk of decelerating revenue per available room, adverse supply growth and, of course, the ever-growing buzz of Airbnb. It s possible the city that never sleeps may absorb the new supply and have a rebound sooner than we think. But what if the downward performance trend continues demand slows and supply increases even more? Will demand continue to grow? The Horwath HTL NYC 2016 midyear market update may surprise you. Overview of the New York market In New York, strong supply growth continued during the first half of 2016, outpacing demand growth, which contributed to the decline in RevPAR. New developments have focused on independent and upscale sectors, which have already reached over half of the market share. The average price per unit in the Manhattan market decreased and the average cap rate was 5.43% at the end of the second quarter of 2016. Cross-border investments are major forces in Manhattan, and represent 72% of the capital flows. By the end of 2016, occupancy declines are expected to slow down, which will drive up average daily rate and RevPAR. New York s key performance indexes, including occupancy, ADR, and RevPAR, showed rapid growth from 2010 to 2014, but declines for the past two years based on the June YTD 2016 data. Occupancy decreased to 83.7% in 2015 and remained flat in 2016, while ADR dropped to $254.72, which resulted in a decline in RevPAR to $213.60 by the end of Q2 2016. Copyright 2008-2018 STR, Inc. Page 1 / 9

Although the key performance indexes grew from 2010 to 2014, occupancy and ADR growth rates have been slowing down since 2012, which resulted in a declining trend of RevPAR for the past two years. Supply, demand and pipeline According to STR, as of the end of Q2 2016, there were 410 hotels in Manhattan with a total of 93,616 rooms. Economy and midscale hotels have the smallest presence in Manhattan market. Independent and upper-upscale hotels have led supply, representing a combined 60.5% of the market, followed by upscale and luxury brands. Copyright 2008-2018 STR, Inc. Page 2 / 9

Compared to five years ago, Manhattan gained a great number of rooms in all chain scales. The significant increase in room supply lies in the upscale and upper-upscale properties. As of June 2016, there were 91 hotels and 19,402 rooms that were either under construction or in the planning phase. Most developments lie in the independent, upscale and upper-upscale sectors. Among them, independent hotels take a large part of planning properties, which indicates its dominant presence in future Manhattan market. Copyright 2008-2018 STR, Inc. Page 3 / 9

Most of the new developments are located near the Midtown and Lower Manhattan areas. Among the hotel projects in the pipeline, a total of 15% of those properties are conversions and 10% are refurbishments. Overall, supply and demand have been growing for the past six years. However, while the growth of supply has been booming in recent years, demand growth has been slowing down year by year. Copyright 2008-2018 STR, Inc. Page 4 / 9

Hotel transaction market and average price per unit The average price per unit for hotel transactions has been flat during the past four years in the U.Ss. The average PPU in Manhattan has been much higher than the national average for the past four years. Since the first quarter of 2016, there has been a decreasing trend in the average PPU in Manhattan and the United States, with a higher decline rate in Manhattan compared to the national average. This trend indicates a cooling down of buyers activities after all the big transactions made by foreign groups, which boosted the selling price in 2015. Cap Rate In the last 12 months, there were 35 hotel transactions at an average cap rate of 5.43% in Manhattan; meanwhile, nationwide there were 1,760 transactions at an average cap rate of 8.47%. According to the chart below, the national average cap rate has been increasing in recent years, while the cap rate in Manhattan has been slightly decreasing year by year, with a drop in Q4 2015 potentially due to some big foreign transactions in Manhattan. In general, the cap rate in Manhattan is lower than the national average, which indicates that the sales price in Manhattan transaction market has been exceeding the national average price for the past four years. Copyright 2008-2018 STR, Inc. Page 5 / 9

Investment activity in the market Major capital flow in Manhattan s hotel market for the past four years has come from cross-border groups, institutional groups, publicly listed companies, real estate investment trusts and private groups. There has been an increasing trend of foreign investment in Manhattan. Conversely, the investment interests of REITs and publicly listed companies have been declining while the institutional and private investment activities have remained steady. Copyright 2008-2018 STR, Inc. Page 6 / 9

In the past two years, the top five buyers in the Manhattan hotel market were Anbang Insurance Group, Lotte Group, ADIA, Blackstone Group and Maefield Development. These investment activities indicate a trend of cross-border capital flows, with Anbang (China-based), Lotte Group (South Korea) and ADIA (United Arab Emirates) are based outside of the U.S. and are investing in Manhattan hotels. The top five sellers in the Manhattan market in the past two years were Hilton Worldwide Holdings, Blackstone, Northwood Investors, Highgate Holdings and Goldman Sachs. Among the list of transactions, the top 20 sellers are U.S. based companies, which shows an opposite trend regarding capital inflows. Copyright 2008-2018 STR, Inc. Page 7 / 9

In the last 12 months, there were 35 hotels sold in the Manhattan area for a combined transactions total of $533 billion and an average price of $562,578 per unit. Forecast The declines in occupancy, ADR and RevPAR seen over the span of the past three years are expected to slow down by the end of 2016. ADR will come back in 2017 with a projected growth rate of 1.7%, along with the relatively small change in occupancy decline, and 2017 RevPAR will increase by 0.7% compared to 2016. Paul Breslin is managing director of the Atlanta office of Horwath HTL. Breslin is a 35-year veteran of the hospitality industry, and his background includes extensive experience in hotel operations, development and asset management with major branded hotels as well as independent and smaller luxury hotels. From asset management and operational support, planning and development services, sales, marketing and revenue management, transactional advice and financial restructuring, Breslin has provided consulting services to a global client base. Julia Zhang is an analyst at the Atlanta office of Horwath HTL. Zhang is currently pursuing her bachelor s degree in Hotel and Restaurant Management at Cornell University, School of Hotel Administration, with a minor in Real Estate. She joined the Horwath HTL Internship Program in June 2016. Julia has extensive work experience in hotel operations and knowledge of hotel development, market research & analysis. The opinions expressed in this analysis do not necessarily reflect the opinions of Hotel News Now or its parent company, STR and its affiliated companies. Columnists published on this site are given the freedom to express views that might be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to comment or contact an editor with any questions or concerns. Copyright 2008-2018 STR, Inc. Page 8 / 9

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